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Bank of Canada says downward pressure on inflation likely once shutdown ends

FILE PHOTO: A jogger runs past the Bank of Canada building in Ottawa, Ontario, Canada, July 11, 2018. REUTERS/Chris Wattie/File Photo

OTTAWA (Reuters) - The Bank of Canada thinks there is likely to be downward pressure on inflation once coronavirus-related shutdowns are lifted, a senior official said on Wednesday, a sign the Bank is in no rush to raise near-record low interest rates.

The central bank, which targets 2% inflation, has slashed its key rate three times to just 0.25% since the crisis started. Data released earlier showed the annual inflation rate in April turned negative for the first time since 2009.

Deputy governor Timothy Lane said Canada would likely emerge with both demand and supply weaker than before. The scarring associated with the shutdown could lower productivity, which tends to result in higher inflation.

“But the Bank’s analysis suggests that the decline in demand stemming in part from weaker business and consumer confidence is likely to have a larger effect. On balance, there is likely to be downward pressure on inflation,” he said in a speech to a Winnipeg business audience via video.

Lane reiterated that the bank expected second quarter growth to plunge anywhere between 15 and 30 percent from its level in late 2019.

The various shocks caused by the crisis “are likely to result in damage to Canada’s productive capacity that may be profound and long-lasting,” he said.

Market expectations of future interest rate moves, as reflected in the overnight index swaps market, show the bank is expected to sit on the sidelines for the rest of 2020.

“There is a risk that the domestic and global recovery could occur in fits and starts,” said Lane, adding that shifts in consumer behavior, such as lower purchases of gas and travel services, meant official measures of inflation were less meaningful.

Canada’s central bank said in April it expected inflation to dive near 0% in the second quarter.

Reporting by Kelsey Johnson and David Ljunggren; Editing by Nick Zieminski

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